China Buys Japan Water Rights on Two-Decade Land Price Slump

Morihiro Oguma’s phone rang every day
with calls from brokers representing foreign investors who
wanted to buy his Japan Mineral water-bottling business.

“In many cases, I was told I could name my price,” Oguma
said in an interview, adding he had no interest in selling the
Hokkaido-based company. “It seems what they really wanted was
our rights to groundwater.”

A two-decade slump in Japan’s real estate prices, an
incomplete land registry and lax rules on buying forest with
water rights are attracting investors led by China and come amid
a fraying of ties between the two countries over a territorial
dispute. Some areas of remote woodland in Japan, the only
country in the Asia-Pacific region that doesn’t regulate
property investment by foreigners, can be bought for 60 U.S.
cents a square meter including groundwater.

Japan, whose population is shrinking, ranks in the top 10
percent of countries by water resources, while China and India,
with the opposite demographic trend, will face shortages from
2030, according to a United Nations report in August. Almost
half of China’s economy is already based in water-scarce
regions, HSBC Holdings Plc (HSBA) said in a Sept. 12 report.

The biggest spike in forest purchases by non-Japanese is in
Hokkaido, Japan’s northern island that is about the size of
Austria and has triple the average water reserves of other
Japanese prefectures, according to Hokkaido government figures.
It has about 60,000 square kilometers (23,170 square miles) of
forest, a quarter of the nation’s total, and supplies 20 percent
of Japan’s food.

Governor Concerned

While the relative size of land owned by non-Japanese
remains small -- 3,700 hectares (37 square kilometers) -- almost
a third of it is on Hokkaido. The island attracted 90 percent of
forest purchases and non-Japanese investors bought 20 times more
land in Hokkaido in 2009 than two years earlier, according to
local government data.

Hokkaido Governor Harumi Takahashi said the concern she has
about some of the land purchases stems from a lack of
information, especially about the development plans of the
overseas investors.

“There emerged cases where we weren’t sure about the
reasons why investors were purchasing such vast areas of land,”
Takahashi said in a Tokyo press conference on Oct. 18. Hokkaido
welcomes investment regardless of where the investor is from,
yet needs to ensure proper use of water resources, she said.

China Buying

China leads the purchases of Hokkaido forest and water
rights with 21 transactions of a total 57. Hong Kong buyers
using Virgin Island-registered offshore companies accounted for
another nine and Singapore investors eight, said Masayuki
Mitobe, the head of water and land economic research for
Hokkaido’s government. He said he could not name the investors
due to privacy laws.

A quirk in Japanese law allows buyers of non-agricultural
land to report the transaction after it’s complete. Hokkaido
closed that loophole in April (APR) when it found some addresses used
by overseas buyers were false, raising concern dummy companies
were being used for the deals.

While Hokkaido authorities now need to be notified of a
deal three months before it’s agreed, so they can investigate
the transaction, only three of Japan’s 47 prefectures have done
the same. Even the new regulation doesn’t allow blockage of land
deals, as it lacks legal authority.

“Forests with abundant water resources are being bought
and sold,” said Masaru Onodera, a member of Hokkaido’s
prefectural assembly. “Some land is vital to national security,
some to protect food supplies.”

Global Concerns

Investor interest in Japan’s water resources comes amid
global concern about future supply. The United Nations has
warned that two-thirds of the globe may be “water-stressed” by
2015, while places such as India’s Rajasthan region have banned
new bottling plants and breweries to conserve aquifers.

A lack of conservation and monitoring may lead to conflicts
over water resources, the UN said in its August report.

“In many countries, national security has historically
been defined as military security,” the UN said. “It is now
understood that military might is only one element in the human
security equation, and that water can play a determining role in
international, national and transboundary conflicts.”

Chinese investors have been looking at the water assets in
Japan with the idea of exporting the bottled resource, said
Hokuto Okudera, head of M&A Support Inc., a Tokyo-based broker
focusing on mergers and acquisitions for small- and mid-sized
companies.

Overheated Interest

“There was an especially overheated interest from 2010
through early 2011” in Japanese water bottling assets, Okudera
said. “In countries like Canada and India the governments are
tightening regulations on underground water extraction. Some
investors targeted Japan as its rules aren’t as strict.”

Control of water resources is important for food security
and national security. In Asia, Taiwan restricts overseas
investment in land that has water or forest resources, according
to a 2011 report on Asia-Pacific real estate by Jones Lang
LaSalle Inc. and Blake Dawson.

New Zealand requires buyers to get prior permission to
purchase land with forest or water resources, while South Korea
requires the same for areas close to military installations, the
report said.

‘No Rules’

“In Japan you can even buy land next to a military
facility or an airport, there are no rules against it at
present,” said Hideki Hirano, author of “Buying Japan” and an
analyst at the Tokyo Foundation think tank, in an interview.
“In today’s world you cannot stop foreign investment, but we
must make sure the investment is regulated.”

On Sept. 28, U.S. President Barack Obama blocked a Chinese-
owned company from developing a wind farm on land close to the
Boardman Navy base in Oregon, citing security concerns. The
Delaware-based company, Ralls Corp., is suing Obama after he
ordered it to remove all property from the land and sell the
wind project within 90 days.

A list of questions on China nationals buying land in
Hokkaido that was faxed to China’s embassy in Tokyo today didn’t
receive an immediate response.

Niseko town, one of Hokkaido’s most famous ski and hot
spring resorts, enforced two ordinances in May last year to
restrain development of areas with water sources and the
extraction of underground water. The town plans to purchase all
land above water sources in Niseko to ensure stable supply,
Noriyuki Higuchi, an official at the town’s planning and
environment division, said Oct. 24 by phone.

Land Registry

Japan doesn’t have a complete land registry to keep track
of ownership and boundaries. The nation began compiling a
nationwide registry after World War II. Half has been completed
and at the current pace it will take another 30 years to finish,
author Hirano estimates.

Hokkaido authorities have no address information for owners
of about 40,000 hectares of forest land, assembly member Onodera
said. He added that 10 percent of letters sent to foreign buyers
of woodland in Hokkaido were returned with the listed address
unknown, he said.

Chinese interest in Japanese land is a sensitive issue in
part due to the territorial dispute over islands known as
Senkaku in Japanese and Diaoyu in Chinese. The conflict sparked
nationwide protests in China this year and led to attacks on
Japanese stores, restaurants and car dealerships.

Bringing Jobs

Near Mount Fuji, Osaka-based Seven Yellow Ltd. pumps
500,000 liters of water a month from a well and exports as much
as 80 percent of it to China.

“Some people know and some people don’t” know that the
company’s biggest shareholder is a Chinese citizen, Katsuhisa
Yoshida, the managing director, said in Seven Yellow’s office
near Lake Shoji, one of the five lakes surrounding Mount Fuji.

The Osaka-based textiles firm expanded into water and
organic farming about one year and a half ago at the suggestion
of its Chinese shareholder, who wanted to go into health foods,
Yoshida said. The investment of Seven Yellow has helped create
jobs in rural Japan that’s starved of local initiatives and is
losing young people to the city, he said.

“We’re not just buying up Japan’s resources, we create
local jobs,” Yoshida said. “We do need to protect our forests
to save the water, and that’s a task for whoever the landowner
is, be they a foreigner or a Japanese.”

In Japan, a landowner’s intake of water from rivers is
regulated, yet the use of groundwater is entirely at the owner’s
discretion, Hokkaido’s Mitobe said.

Cheap Land

Go Okazaki founded the Tokyo-based Standard & Initiatives
Properties three years ago to invest in forest land.

“Japan’s land is cheap,” Okazaki said. “The water
business is quite easy to get into and from a commercial
standpoint, it’s a limited resource.”

Given current prices and the closed nature of Japan’s
timber market compared with North America and Russia, it makes
sense to buy forest for water resources, Okazaki said. The cost
of cutting trees and reforestation is almost three times the
timber prices, he said.

A square meter of forest land sold for an average of 47 yen
(60 U.S. cents) in March, compared with a peak of 89 yen in
1983, Japan Real Estate Institute said in a September report.

“What water volumes you’ll get and how deep you’ll need to
drill depends on the place,” Okazaki said. “But if you dig
you’re bound to strike water anywhere in Japan.”